Micula and others v Romania [2020] UKSC 5

In a judgment issued on 19 February 2020, the United Kingdom Supreme Court (the “UKSC”) lifted a stay to permit Swedish investors (the “Micula Brothers”) to proceed with enforcement of their EUR 178 million arbitral award against Romania.  The UKSC decided that national courts have no power to stay the enforcement of ICSID awards on substantive grounds for an indefinite amount of time.  

The Court also held that the UK owes obligations to all Contracting States to the ICSID Convention and not only to the State of nationality of the party seeking to enforce the award.  In practice, this means the UK arguably rejected the concept of “Intra-EU Arbitrations” in the ICSID context. Our previous briefings explain that in Intra-EU Arbitrations the investor’s State of nationality and the host State are both Member States of the European Union (the “EU”).    Consequently, EU law may control key aspects of the arbitration proceedings (e.g., whether and how Member States may agree to arbitrate investment disputes; whether they can enforce awards which, in the opinion of the EU’s organs, violate EU law). The UKSC decided that ICSID Convention obligations always involve rights of States other than EU Member States.  These States have not consented to EU law. Therefore, any situation in which EU law trumps ICSID Convention obligations (or, what is the same, the other States’ rights) would arguably infringe the rights of these third States. The UKSC also confirmed that EU treaties do not affect the UK’s obligations under the ICSID Convention. 

The UK may thus become a safe haven to enforce awards issued in the course of Intra-EU Arbitrations.  Investors seeking enforcement will welcome the decision. 

Background

In October 1998, Romania enacted various incentives for investments in two economically underdeveloped regions of the country. The Micula Brothers made investments in large-scale food production facilities in reliance on those incentives.  The European Commission (the “EC”) had warned Romania that the tax incentives constituted illegal State aid.  Romania had assured the Micula Brothers it would not repeal these incentives, but eventually decided to repeal them.  After the investments were made and as part of its accession to the EU, Romania repealed virtually all of these incentives. 

In 2013, an ICSID tribunal held that Romania’s withdrawal of the incentives breached the Micula Brothers’ rights under the 2002 Sweden-Romania BIT.  It ordered Romania to pay approximately EUR 178 million in compensation.  Romania failed to obtain an annulment of the award (the “Micula Award”).  It made a partial payment of the compensation ordered by the Tribunal.  In March 2015, the EC ordered Romania not to pay the remainder of the compensation due under the Micula Award, and to recover the partial payment because it constituted illegal State aid.  On 18 June 2019, the General Court of the European Union (the “GCEU”) annulled the EC’s decision on the basis that the EC had exceeded its competence to the extent that it had applied its State aid powers retroactively and annulled the EC’s decision.  The EC’s appeal to the Court of Justice of the European Union (the “CJEU”) is still pending.

The Micula Brothers have sought enforcement of the Micula Award within and outside the EU, including in the UK (Judgment, para. 25).  They applied to register the Micula Award in the Commercial Court, pursuant to the UK statute applicable to the enforcement of ICSID awards: the Arbitration (International Investment Disputes) Act 1966 (the “1966 Act”).  The Commercial Court registered the Micula Award on 17 October 2014.  Romania applied to vary or set aside the order registering the award.  In 2017, the High Court dismissed Romania’s application, but stayed enforcement of the Micula Award pending the decision in the CJEU to avoid potentially conflicting decisions. The Court of Appeal dismissed the Micula Brothers’ appeal against the order for a stay for similar reasons, but granted their request for security.

Romania appealed to the UKSC against the order for security; the Micula Brothers filed a cross-appeal against the stay.

Decision

The UKSC dismissed the appeal and granted the cross-appeal, lifting the stay of the Micula Award.  It held that: (i) the lower courts exceeded the powers granted by the ICSID Convention when granting a stay; (ii) the relevant EU Treaties do not have any relevant effect on the interpretation of the UK’s obligations under the ICSID Convention; and (iii) the duty of sincere cooperation is not engaged where the possibility of the EU courts making a decision on the same ground as in the enforcement proceedings is both contingent and remote. 

Stays of enforcement of awards under the ICSID Convention

Article 53(1) of the ICSID Convention provides, in relevant part, that “[t]he award shall be binding on the parties and shall not be subject to any appeal or to any other remedy except those provided for in this Convention”.  Article 54(1) provides that ICSID Member States should recognize any award as binding and enforce it “as if it were a final judgment of a court in that State.”  Section 2(1) of the 1966 Act provides in relevant part that an ICSID award registered under Section 1 of the act “shall, as respects the pecuniary obligations which it imposes, be of the same force and effect for the purposes of execution as if it had been a judgment of the High Court given when the award was rendered pursuant to the Convention and entered on the date of registration under this Act”.  Section 2(1) then provides that proceedings can be taken on the award, that it carries interest and that it is subject to High Court control “as if the award had been … a judgment of the High Court.”  The issue before the High Court was whether an arbitral award registered under section 2(1) of the 1966 Act could be equated for all purposes to an ordinary domestic judgment.  The High Court noted that it would not enforce a domestic judgment conflicting with a decision of the Commission. Since it deemed the award equal to a judgment of a domestic court, it held that the enforcement in casu would be equally inappropriate due to the risk of inconsistent decisions in the GCEU (Judgment, para. 65).

The majority in the Court of Appeal dismissed the High Court’s interpretation of the section 2(1) of the 1966 Act.  The Court noted that a registration of the award under section 1 of the 1966 Act merely allows a domestic court to grant a stay of execution in certain limited cases consistent with the ICSID Convention (Judgment, para. 66).   The UKSC had to ascertain the scope and effect of section 2(1) of the 1966 Act which implements Article 54(1) of the ICSID Convention.

The UKSC confirmed that the ICSID Convention regime is self-contained (i.e., it makes specific provision for staying enforcement under Articles 50(2), 51(4) and 52(5), none of which applied in this case).  However, the UKSC held that Articles 54 and 55 of the ICSID Convention and the travaux préparatoires support the proposition that “there is scope for … additional defences against enforcement, in certain exceptional or extraordinary circumstances which are not defined [in the ICSID Convention], if national law recognises them in respect of final judgments of national courts and they do not directly overlap with” Articles 50 to 52 of the ICSID Convention (Judgment, para. 78). 

The UKSC did not further define these circumstances.  However, it did specify that the courts could not use their power to stay awards on “substantive grounds”, of the kind that would feature in an appeal.  The Supreme Court held that the stay of the Micula Award “was not a limited stay of execution on procedural grounds, but a prohibition on enforcement of the Award on substantive grounds until the GCEU had ruled on the apparent conflict between the ICSID Convention and the EU Treaties”.  An unlimited stay on substantive ground as granted by the High Court violated Articles 53(1) and 54 of the ICSID Convention, as ICSID awards are binding and subject to neither appeal or nor to any remedy other than ICSID Convention remedies (Judgment, para. 84)

The application of Article 351 TFEU in matters involving conflicting pre-accession obligations with EU treaties

In general terms, EU law prevails in interpreting treaty obligations between EU Member States.  Therefore, a second question before the UKSC concerned the potential conflict between the ICSID Convention, which requires enforcement of the Micula Award, and the provisions of EU law (e.g., the provisions concerning state aid), which may call for the opposite.  This question centred on whether and to what extent Article 351 of the Treaty on the Functioning of the European Union (“TFEU”) applies.  Article 351 provides in relevant part that “[t]he rights and obligations arising from agreements concluded … for acceding States, before the date of their accession, between one or more Member States on the one hand, and one or more third countries on the other, shall not be affected by the provisions of the [EU] Treaties.”  

The UK was not an original party to the Treaty of Rome (1958), which founded what is now the EU.  It acceded to the EU’s predecessors, the European Communities, on 1 January 1973.  The ICSID Convention entered into force in the UK several years before accession, on 18 January 1967.

The UKSC held that Article 351 TFEU provides that, “in accordance with principles of international law”, the application of EU treaties “does not affect the duties of a member state to respect the rights of non-member states under a prior agreement and to perform their obligations thereunder” (Judgment, para. 97).   Relying on EU jurisprudence, the UKSC held that national courts determined the extent of pre-accession obligations (Judgment, para. 99).

Notably, the UKSC found that obligations under the ICSID Convention are owed to all States that are parties to the Convention, and not only between the State of enforcement and the State of which the investor is a national.  Romania had argued that the UK only owed a legal obligation under the ICSID Convention to Sweden, another EU Member State.  For Romania, Sweden was the only other State with a direct interest in enforcement. If Romania’s interpretation of ICSID Convention obligations prevailed, the UKSC would be bound not to apply Article 351 as this would be an “intra-EU” matter.

However, the UKSC held that the UK owes the obligations to enforce ICSID awards not only to Romania and to Sweden, but also “to all other Contracting States” (Judgment, paras. 104-106).   The UKSC held that “neither  the  Convention  nor  its  travaux  préparatoires  provide  any warrant for restricting the duties owed by a Contracting State under articles 54 and 69 so that they are owed only to the State of nationality of an award beneficiary” (Judgment, 108).  The UKSC held that Article 351 TFEU precludes the application of the EU Treaties on interpreting relevant obligations of the UK arising from the ICSID Convention. Therefore, EU law had no bearing on the UKSC’s interpretation of the relevant ICSID provisions.

The practical effect of the UKSC’s interpretation is that obligations under the ICSID Convention are never an exclusively “intra-EU” matter, over which EU law would theoretically prevail.  If the UK owes obligations to all parties to the ICSID Convention, including especially non-EU Member States the ICSID Convention engages the “duties of a member state to respect the rights of non-member states under a prior agreement”, in the sense of Article 351 TFEU.

The risk of breaching the duty of sincere cooperation

Article 4(3) of the Treaty on European Union (“TEU”) establishes the “principle of sincere cooperation”.  Article 4(3) requires the EU and its Member States “in full mutual respect, [to] assist each other in carrying out tasks which flow from the Treaties.”  Among these tasks, Article 4(3) includes the duty to “take any appropriate measure … to ensure fulfilment of the obligations arising out of the Treaties or resulting from the acts of the institutions of the Union.”

Thus, a question before the UKSC was whether the duty of sincere cooperation prevents the UK courts from making a decision on the interpretation of Article 351 TFEU.  The UKSC noted that the issue of interpretation of Article 351 TFEU was not under appeal to the CJEU because the GCEU did not rule on this point (albeit pleaded by the Micula Brothers; Judgment, para. 113.)  The UKSC thus held that the possibility that EU courts would consider this issue “at some stage in the future is both contingent and remote”.  Therefore, the duty of sincere cooperation under EU treaties did not require a stay on enforcement (paras. 51, 112-113, 117).  No risk of conflicting decisions existed.

Implications

The UKSC’s conclusion that domestic courts lack powers to stay enforcement on “substantive grounds” strengthens the provisions on enforcement of awards under the ICSID Convention.  As a number of EU courts have disputes related to the enforcement of the Micula Award on their dockets.  Therefore, contrary to the UKSC’s belief, future pronouncements by EU courts on the Micula Award may be neither “contingent” nor “remote” (Judgment, para.117).  In the context of the magnitude of these proceedings, the UKSC’s narrow interpretation of the duty of sincere cooperation is only engaged where the risk of conflicting decision is both imminent and direct. Nevertheless, the unwillingness to stay enforcement of ICSID awards on “substantive grounds” is a welcome development for parties seeking enforcement in the UK.

The conclusion that States parties to the ICSID Convention owe obligations under that convention to all other States parties is equally significant and important.  If the obligation to enforce awards in Intra-EU Arbitrations concerned only the EU Member States most directly affected by enforcement of the Micula Award (i.e., Romania, Sweden and the UK), it is arguable that these States’ obligations under EU law would trump ICSID Convention obligations as a matter of the law of treaties.  The concept of Intra-EU Arbitrations makes sense because international law permits States, in certain circumstances, to derogate as between themselves only (e.g., through the EU treaties) from rules contained in other treaties (e.g., the ICSID Convention).  However, in agreeing to modify their rights in this way, States cannot diminish or violate the rights of third States, which have not consented to any derogation of their rights under international law. 

For the UKSC, a refusal to enforce the Micula Award would implicate the rights of all States parties to the ICSID Convention.  In other words, the United Kingdom would be violating its obligations to all signatories of the ICSID Convention, including States that have not consented to EU treaties and are not EU Member States, if it failed to enforce the Micula Award.  The need to comply with the EU treaties would afford no defence in these circumstances.

That is an extremely significant finding.  If correct, it means that the entire debate within the EU regarding the enforceability of awards in Intra-EU Arbitrations is based on a false premise insofar as the ICSID Convention is concerned.  If all ICSID obligations are owed to all ICSID States parties simultaneously, there would be no such thing as an exclusively Intra-EU Arbitration under this Convention.  Investors will likely welcome the reasoning in the UKSC’s decision.  They may use it to oppose arguments by the EC when it intervenes in Intra-EU Arbitrations.   

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